Weekly Indicators: Economy Vulnerable to Shock Edition

by: Hale Stewart

by New Deal Democrat

Without doubt, the rear view mirror news of a steep reduction in first Quarter GDP to a puny +0.4%, and the below expectations +1.3% 2nd quarter GDP, was the biggest item of the week. Durable goods and consumer confidence also fell - and durable goods had been expected to increase. Both of these are components of the LEI. Meanwhile the Case Shiller index was mixed, with month over month increases, but a deepening decrease in the March - May period. And then there is the utter lunacy in Washington, still continuing as I write this.

The resurrection of Andrew Mellon's mentality in Washington, that we shall shrink our way to prosperity, is doubly accursed, because the high-frequency weekly indicators showed a rebound for the second week in a row:

Plummeting Gasoline usage continues to be balanced by increasing retail sales

Oil finished at $95.70 a barrel on Friday. Gas at the pump rose another $.02 to $3.70 a gallon. Gasoline usage at 8999 M gallons was -6.6% lower than last year's 9632. This is the fifth week in a row that gasoline usage has been significantly less than last year, and the worst weekly comparison yet. Further, with the exception of 3 weeks, this comparison has been negative YoY since the week of March 12. With few exceptions, all this year Oil has been at or above the level of 4% of GDP which according to Oil analyst Steve Kopits is the point at which a recession has been triggered in the past. Indeed, the most recent decline in gasoline usage - similar to the decline in the last few months of 2007 - viewed alone must be viewed as flashing a full recession alarm.

Retail sales, however, tell a completely different story. The ICSC reported that same store sales for the week of July 23 increased 4.2% YoY, and increased 0.3% week over week. Shoppertrak reported a 4.3% YoY increase for the week ending July 23 and a WoW increase of 2.8%. This is the fifth week in a row of a strong rebound for the ICSC, joined for the second week by Shoppertrak.

The American Association of Railroads reported that total carloads increased 1.1% YoY, up 5800 carloads to 524,100 YoY for the week ending July 23. Intermodal traffic (a proxy for imports and exports) was up 1800 carloads, or 0.8% YoY. The remaining baseline plus cyclical traffic was up 3900 carloads, or +1.4 YoY%. This series has rebounded after going negative two weeks ago. Railfax graciously gave me their breakdown of baseline vs. cyclical carloads, which shows that baseline traffic was down 6104 carloads, or -3.3%YoY, while cyclical traffic was up 11,858 carloads, or +11.9% YoY.

As I pointed out last week, Professor James Hamilton of UC San Diego showed Oil shock recessions are triggered by overcompensating cuts in spending by consumers. In contrast, this year consumers appear to have instead cut back on gasoline in order to increase other retail purchases. Rail traffic likewise indicates a stall, but not a contraction at this point.

Employment rebounded slightly from its stall:

The BLS reported Initial jobless claims under 400,000 for the first time in 3 months last week, at 398,000. The four week average decreased to 413,750. Jobless claims are on the verge of breaking out to the downside from their recent range of 410,000 - 430,000.

The American Staffing Association Index rose 4 points to 88. The ASA indicates that this is a typical rebound from the prior July 4 holiday week decrease. This trend of this series for the year remains worse than 2007, but slightly better than the early recession of 2008.

Adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that withholding taxes collected for the first 18 days of July 2011 totaled $124.6 B vs. $116.8 B a year ago, for an increase of $7.8 B. For the last 20 days, $135.0 B was collected vs. $126.4 B a year ago, for an increase of $8.6 B, or 6.8%. In the past month, this comparison has improved considerably compared with its May - June stall.

Since these series all completely stalled in May and June, this two week rebound is welcome.

Housing sales continue to stabilize, and price decreases are getting "less worse":

The Mortgage Bankers' Association reported that seasonally adjusted mortgage applications decreased -3.4% last week. For the 8th time in 9 weeks, however, the YoY comparison in purchase mortgages was positive, up 2.2% YoY. Refinancing also decreased -5.5% w/w. The last 9 weeks have shown the best YoY comparisons since late 2007.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker showed that the asking prices declined -4.2% YoY. The areas with double-digit YoY% declines decreased by one to 8. The areas with YoY% increases in price increased by one to 8. This continues the record of improving YoY comparisons in this series.

We are at the point of maximum economic impact due to the abrupt 100,000 decrease in housing starts in spring 2010. The above two series indicate relative improvement going in to 2012.

Money indicators are generally bullish:

M1 remained even w/w, but was up 2.4% m/m, and up 14.6% YoY, so Real M1 was up 11.2%.
M2 was up 0.4% w/w, up 2.2% m/m, and up 7.8% YoY, so Real M2 was up 4.4%.
Both M1 and M2 have surged in the last 4 weeks. Real M2 is now solidly in the green zone above +2.5%, meaning that both money supply indicators are bullish.

On the other hand, weekly BAA commercial bond rates increased .04% to 5.75%. Yields on 10 year treasury bonds decreased .03% to 2.97%. This continues to indicate slowly increasing deflationary fears, and a slight increase in relative distress in the corporate market.

My old German grandmother used to have a saying which translates as "those who cannot see must feel." There is nothing in the high frequency data telling us that we are tipping over into a double-dip recession at this time, although very weak growth just above a stall has been evident for several months. But the economy is very vulnerable to a shock, as durable goods orders and plummeting consumer confidence show. Washington seems determined to provide that shock. America has been unable to see, and so it looks inevitable that shortly it will begin to feel.